Dollars & Sense: Construction Headaches
|by Cheryl Normandeau|
Often, when one considers the purchase of a new home, our minds will wander. We see ourselves pictured in bright new surroundingsspacious floor plans, large white kitchens with marble counters, cathedral ceilings. These wonderful feelings of delightful anticipation can bring an excitement to the air. One sometimes gets caught up in the building "process"moving from construction loan to permanent mortgage.
Does this have to be stressful? Does this have to bring on migraines? The answer to these questions is NO! You hear of other peoples headaches when they have gone through the process, but there are those success stories out there, too. Here are steps to take when venturing into a construction loan to permanent mortgage for your new house.
One: You first must get approved for an end mortgage. This is the mortgage that you will have once your house has been built and a certificate of occupancy issued. To get approved for an end mortgage, you will need to provide the normal documentation required by the mortgage office in order to submit your application for approval. In the case of a construction to permanent loan, you will need to show evidence of either owning the land or a contract of sale for the purchase of the land where your new home will be built. You will also need to provide a copy of the contract with your builder and the plans and specifications for your new home. It is easier to have all of this ready at the time of the initial application, but some people find the land first, then shop for a builder. Ask your realtor to provide some assistance to help you locate some potential builders. The total transaction cost is based on the cost/appraisal of the land plus the cost of the house. Sometimes, builders give what is called an "allowance" of dollars for certain items within the contract. This is done to allow you the opportunity to make specific choices along the way of building. An example of this is a kitchen allowance; most builders will generally allow a certain amount toward appliances, cabinets, etc. Another example might be landscaping; you will not know how to landscape until you get further along the project, so here, an allowance built in will help.
Two: Once a loan approval for the end mortgage has been obtained, your mortgage representative will help secure the financing for the construction loan. This loan will be used to either purchase or pay off an existing lien on the property and make monies available to the builder to build your house. This is accomplished through "draws". The builder will go to the bank and make requests to "draw out" an amount of money as they go through the building process. An amount for clearing the land, foundation, framing, electrical, heating, plumbing, etc. will be made available to pay for the project as the house is built. Each of these draws is made after inspections of each of the steps occur. The bank holding the construction loan usually has their own process in place to ensure the builder has completed one step before issuing additional funds toward the next.
During this process, you will pay interest only on the amount of draws total. This means that your first construction loan payment is pretty small and will subsequently get larger as the structure nears completion. The building process usually takes about 4-6 months. Obviously, you will save money if your builder completes your house sooner. Generally, this interest is tax deductible, but check with your tax advisor to verify this.
Three: During the construction process, you will probably make some changes that require a "change order". Depending on your builder, they may ask you to pay for these changes as they occur, or they will add it through an addendum to the contract of sale. Make sure you communicate this information to your mortgage representative as it occurs. You will be asked to make a lot of decisions during this time; if you have spent time prior to this determining exactly what you like in a house, then most of this will have been worked out already. Sometimes these changes can be worked into your mortgage.
Remember, during this building process, Mother Nature may postpone your builder at times. Its not their fault if this occurs, especially when the roof isnt on yet!
Four: Your house is near completion! The only thing left is the countertop and some flooringalmost ready for that final inspection. The Mortgage Company had an appraisal completed on paper at the start of this process. Now, the appraiser needs to go back and verify that what was appraised on paper is what was actually built. If there are 4 bedrooms on the plan, then 4 bedrooms need to be finished right down to the flooring. The final inspection process isnt too involved, but must be completed.
Five: End Mortgage Settlement! The house is done, the builder has received the certificate of occupancy, and now its time for the end settlement. This settlement is similar to one of an existing property. Once this is complete, you take possession of your new home and begin regular mortgage payments the following month.
As you see, the process can be easily broken down to some simple steps. Looking at the process in total can sometimes evoke stress; breaking it down makes life just a little easier!
Cheryl Normandeau is a mortgage loan officer for Norwest Mortgage, Inc. in Rehoboth Beach and may be reached at 302-227-1865, or 888-217-5700.
LETTERS From CAMP Rehoboth, Vol. 9, No. 2, March 12, 1999